In the mobile data industry, is the network effect being hampered by broadcast content?

A synopsis –

We first discuss the meaning of the two terms ‘network effect’ and ‘broadcast content’ and question if the requirements of these two are mutually contradictory. Finally, we outline the proposition that more openness will foster the network effect in the industry leading to viral applications.

a) what is Metcalfe’s law or network effect?

The network effect, also known as Metcalfe’s law(for the purposes of this discussion, we can use these two terms interchangeably) was the main driver behind the dot-com model. While Metcalfe’s law has inevitably been tarred by the failure of the dot-com boom, the benefit of hindsight shows us that the network effect is indeed a valid phenomenon(albeit misapplied in the dot-com context)

The network effect causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service. Metcalfe’s law states that the total value of a good or service that possesses a network effect is roughly proportional to the square of the number of customers already owning that good or using that service.

S. J. Liebowitz and Stephen E. Margolis elaborate more in their paper Network Externalities (Effects) by giving an example of a fax machine. In effect, the value availed from a fax machine has two components – firstly the ‘intrinsic value component’ of a single fax machine but also ‘the network effect component’ i.e. value gained by other users using fax machines(i.e. the ability to communicate/network effect)

The concept of network effect is thus tied to the concept of ‘critical mass’ i.e. at a certain point called as the critical mass, the benefits gained from the ‘network effect component’ kick in and lead to huge competitive advantage and increased revenue. In short, a successful application. Until that happens, the full potential of the technology/service cannot be availed and the user base is confined only to early adopters. The dot com boom(and bust) adopted the above principle(which is valid) and added to it the concept of ‘unprofitable enterprises’ (which is invalid).

However, the benefits of network effect are not in doubt. In fact, with hindsight, we can see that network effect works(think success of ebay).

b) How does this phenomenon play out in the mobile data industry?

Clearly, if we find a set of applications/technologies that have a tendency to benefit from the network effect, we could all benefit. But sadly, at the moment – we see a number of ‘failures’ rather than successes. The key ‘success’ in terms of the benefits of network effect is the humble old SMS. In fact, the success of SMS(and also more broadly the success of GSM – which is a collaborative venture) shows that the industry indeed can ‘get it right’.

c) How do we then explain the many failures(i.e. why do we see so few network effect applications?

Taking a step back, lets see what factors contribute to the proliferation of the ‘network effect component’? The usual factors prevail – the service must be cheap, easy to use, the customers must want it .. and so on. But over and above all this .. the service must be ‘interoperable’ or ‘capable of being viral’. In other words, it must be capable of spreading. If we introduce barriers to the spread of content – we kill it even before we even start. Forget about network effects!.

Take MMS – clearly this technology/service could benefit from the ‘network effect’ component. In simplest terms, it should be easy to ‘share’ content with other users. This means more people will take up MMS if they can firstly create their own content and secondly share that content(cheaply and easily). Creation of own content is possible via camera phones – sharing it cheaply and easily is far from possible!. So, who uses it(if at all)? Inevitably,it’s early adopters who have found a better way(sharing images by bluetooth or email) but it’s not the mainstream user.

If the benefits of the network effect are apparent from the Internet, why does the mobile data industry create so many barriers? Could it be because they are driven by the media/content industry with it’s protectionist/broadcast/DRM mindset? Indeed, I believe that the requirements of the media/content industry are in contradiction to the ‘network effect’ application. In the former, you must restrict the free flow of content. In the latter, you must actively encourage the free flow of ‘user created content’. Note this is not an argument for the ‘napster mindset’. We are not advocating swapping of ‘Hollywood’s created content but rather seek to encourage the free flow of ‘user created content’. At the moment, the restrictions put in place serve the media industry at the expense of the ‘real customers’ i.e. those who want to communicate. And this cripples the mobile data industry.

The mobile data industry must realise that it’s far bigger than the ‘song and dance’ crew. We are a major communications platform and we must not let outdated business practises hamper the true potential of our industry.

At the moment, the industry is facing the media barons with it’s back to the customer! It is driven by the ‘broadcast content’ model. The ‘Lord of the rings’ ringtone, ‘Harry Potter’ images and so on. All driven by the music industry/Hollywood. The chase for media dollars serves a short term goal. Operators must realise that they are the masters and not the slaves to the media industry.

When we speak to operators, they often naively talk of ‘on portal/off portal’ and insist that there are no walled gardens in the industry today. But that’s very limited thinking. OpenGardens is in effect, a mindset which makes the rise of an application with a high ‘network component’ possible.

d) Extending this thinking further, my advice at the moment is to ‘seek the network effect application’ but focus on the ‘multiple channels to market’ to help build up sales for your new service.

Ultimately, when the mobile data industry will move beyond serving the media industry to serving their real customers, the industry will lend itself to applications that thrive on the network effect – and that will create an ecosystem to the next ‘killer app’.